Credit-market investors are treating Lexmark International Inc. (LXK) like a junk-bond issuer as the maker of laser and inkjet printers for businesses struggles to sell its equipment in an increasingly paperless world.
Lexmark’s bonds and credit-default swaps tied to its debt imply the market perceives a credit rating of Ba1, according to Moody’s Corp.’s capital markets research group, compared with its actual rating at Moody’s Investors Service of Baa3. The swaps have surged to the highest level since 2009, according to prices compiled by Bloomberg.
The perception of creditworthiness of Lexmark, spun off in 1991 by International Business Machines Corp. (IBM), which Standard & Poor’s upgraded to AA- from A+ on May 30, is deteriorating as investors grow leery of its prospects. The Lexington, Kentucky- based company is trying to become a provider of corporate printer services and document management, a strategy that hasn’t paid off as the decline in its traditional business outweighs contributions from new areas.
“Lexmark is in a mature-to-declining industry with a weakening position, which is pressuring profitability,” said Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc. in New York. “I personally do not believe the business is worthy of investment- grade status.”
Default Swaps
Credit markets agree. Swaps on the company’s debt have surged since April, adding 92 basis points to 338 basis points today, Bloomberg prices show. That means investors would pay $338,000 annually to protect $10 million of Lexmark’s debt.
The contracts have jumped 149 basis points since June 1, 2011. Credit swaps, which typically fall as investor confidence improves and rise as it deteriorates, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.
Lexmark’s $300 million of 6.65 percent bonds due June 2018, which traded as high as 115 cents on the dollar in April, have fallen to 112.1 cents on the dollar where they yield 4.34 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
That’s closer to the 4.46 percent Bloomberg Fair Market yield for seven-year, BB rated industrial bonds than the 3.19 percent on BBB- debt of that maturity.
Free Cash
The bonds’ implied Baa3 grade matched the Moody’s rating through May 24. S&P rates the debt BBB-, Bloomberg data show.
The company, which has sold printers to consumers through retailers such as Wal-Mart Stores Inc., Best Buy Co. and Target Corp., is trying to develop a managed print services business, contracts under which it provides all the printing needs of a corporation or government agency. That strategy made for a “mixed” year in 2011 for Lexmark, according to Toni Sacconaghi, an analyst at Sanford C. Bernstein & Co.
“While the company has developed a healthy and growing managed print services business and begun to diversify into software, its inkjet business has continued to struggle and its financial results have been undermined by continued decline in its legacy supplies business,” Sacconaghi said on a conference call from the Sanford C. Bernstein Strategic Decisions Conference on May 31.
“It’s a bit of a headwind we’re fighting as far as getting overall growth,” Chief Executive Officer Paul Rooke said in a telephone interview. “We’ve come a long way from where we were.”
Lexmark’s leverage, as measured by the ratio of its debt to earnings before interest, taxes, depreciation and amortization was 0.98 times at the end of the first quarter, down from 1.47 times at the end of June 2009, Bloomberg data show.
Cash Dwindles
Cash and marketable securities fell $200 million from the end of 2011 to $949 million because of acquisitions. The company has about $650 million of long-term debt, with $350 million maturing in 2013 and the rest in 2018, Bloomberg data show. Lexmark’s revenue is expected to fall to $4 billion in 2012 and $3.9 billion next year from $4.17 billion in 2011, according to the average estimate of nine analysts surveyed by Bloomberg.
Lexmark was the printer division of IBM until 1991, when it sold the unit for $1.5 billion to Clayton Dubilier & Rice LLC, according to Hoover’s Inc. Clayton Dubilier sold it to the public at $20 a share in 1995, valuing the company at $1.78 billion, Bloomberg data show.
IBM, which has been emphasizing software and services over hardware, was upgraded at S&P because of its shift to these “more stable and higher margin” businesses, S&P’s analyst Martha Toll-Reed said in a report.
Returning Cash
Lexmark plans to return more than half of free cash flow to shareholders through dividends and share repurchases, Rooke said in a conference call from the Sanford C. Bernstein Strategic Decisions Conference with analysts on May 31.
Lexmark gave $268 million back to shareholders last year via stock purchases and dividends, more than its $234.5 million of free cash flow, and in the first quarter this year repurchased $30 million of shares and paid a dividend of 25 cents a share, or about $18 million.
Free cash not destined for shareholder rewards will be used to “invest for growth, both organically and with a focus on acquisitions to drive long-term shareholder value,” Rooke said on the conference call.
‘Strategic Shift’
The company’s shares dropped 6.5 percent on April 24 to $30.44 after it reported quarterly adjusted earnings of 84 cents a share, lower than the $1.08 average analyst estimate in a Bloomberg survey. The stock has erased 24 percent of its market capitalization this year, closing at $24.98 on June 1.
“Lexmark is in the midst of a strategic shift to higher usage workgroup printers and more profitable supplies sales, but, in our opinion, the company remains vulnerable to economic cycles and pricing pressure,” Toll-Reed and Philip Schrank, another S&P analyst, wrote in an April 30 note affirming the company’s BBB- rating and “stable” outlook.
The analysts wrote the outlook would be “negative” if Lexmark’s profitability consistently declines or if its financial policies become more aggressive, “with sustained leverage in excess of the low” 2 times areas.
Business outside the U.S. accounted for 57.9 percent of Lexmark’s revenue last year, with 37 percent coming from Europe, the Middle East and Africa, Bloomberg data show.
Hewlett-Packard Co., the world’s largest personal-computer maker, is consolidating its PC and printer business, and the Palo Alto, California-based company will look to reclaim market share Lexmark gained, according to Mark Moskowitz, a San Francisco-based analyst at JPMorgan Chase & Co.
As global growth slows as consumers and governments cut spending to stem Europe’s sovereign debt crisis, competition will heat up, he said.
“In an environment where we could be setting up for another macro tailspin, you can bet for sure that printing is going back to the bottom rung,” Moskowitz said in a telephone interview. “Within six to nine months, you’re going to hear about a bloodbath in printing.”
To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net
To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net
MONEY MARKETS-Funding cost rises on Europe worries - Reuters UK
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Money-Transfer Fees: Profits Come From Immigrants Sending Money Home - The Ledger
Both resent having to pay Western Union a $10 fee to send money abroad and an additional cut to convert dollars to pesos. But these charges have fueled the company's record profits and made it a relative outlier in the financial services industry. As billions of dollars in fee income have evaporated at the nation's largest banks because of regulations passed in the wake of the financial crisis, the money-transfer industry has escaped the crackdown.
Soon, however, the companies, which are largely regulated by states, will be subject to new federal rules. Starting in February, they will have to disclose more to customers about transfer fees and currency exchange rates. The rules, part of the Dodd-Frank financial regulation law, will also require companies to give customers up to 30 minutes after a transaction to get a full refund.
But consumer advocates are raising alarms that money-transfer companies face fewer restrictions because the rules do not touch the pricing of services.
"You still have a situation where customers are subjected to these predatory products with no cap on fees or exchange rates," said Oscar Chacon, the executive director of the National Alliance of Latin American and Caribbean Communities in Chicago.
Money-transfer companies say that they offer an invaluable service for customers who might not have access to traditional banks and who would otherwise have no way of transmitting money to their families.
"The money-transfer industry is very competitive, and consumers have a range of choices for sending money," said Tom Fitzgerald, a Western Union spokesman.
Western Union, which dominates the money-transfer market, notes that it already discloses the amount of money being submitted, the exchange rate and the amount that the recipient will receive. It also tells customers that "in addition to the transfer fee, Western Union also makes money when it changes your dollars into foreign currency."
Esparza, who sends money to his children in Mexico City, said that the $10 fee would not be onerous if he were sending a larger amount, but that it seemed exorbitant for $50.
Gonzalez said that even though $10 might not seem like a lot, "In Mexico, that money goes farther."
Aside from the transfer fees, Western Union and other similar services profit as they buy batches of currencies at a wholesale rate. The money-transfer companies do not disclose the spreads they benefit from when they set exchange rates.
"It's a big profit center for these companies, borne on the backs of the people who can least afford it," said Matthew Piers, a lawyer in Chicago, who successfully brought a lawsuit on behalf of Mexican immigrants against Western Union in 2000 that accused the company of misrepresenting exchange spreads.
Western Union did not admit or deny wrongdoing, but agreed to pay more than $400 million to settle the claims.
For Javaid Tariq, a taxi driver in New York City who sends money monthly to his family in Pakistan, the exchange rate is particularly infuriating because of how much money he loses. When he sent $300 to his family in April, he received 89.2 rupees for every dollar, less than the 91.2 exchange rate that he checks each morning, he said. For his family, that means 599 fewer rupees, or more than a week's salary in Lahore.
Frustrated, Tariq said, "They are taking this money from the people who can least afford it."
Analysts expect the market for money transfers to grow. The value of cross-border transfers is expected to reach $437 billion in 2012, up from $387 billion in 2009, according to the Aite Group, a research and advisory firm. In the United States, this is led partly by a growth in transfers to China and India and an influx of immigrants from western and eastern Africa, said Larry Berlin, an analyst with First Analysis in Chicago.
Western Union and rival companies are poised to profit. Western Union, with the largest share of the market at nearly 18 percent, recorded $4.2 billion in transaction fees last year, up 4 percent from 2010. The fees accounted for more than 75 percent of the company's total revenue last year.
Finance Services Leaders Appeal for Limited Government Aid to Fight Cyber Attacks - PC Advisor
A group of industry experts representing the financial services industry, an increasingly popular target for cyber criminals, on Friday appealed to members of a House subcommittee for limited government action to help banks and other institutions protect themselves and their customers from the growing breadth and sophistication of online attacks.
Their wish list includes policy changes to facilitate greater sharing of threat information among public- and private-sector entities, stricter law enforcement in the United States and abroad, and a more holistic approach to the policing the Internet ecosystem.
Banks and other financial services firms already have sophisticated cybersecurity mechanisms in place, of course, but even state-of-the-art perimeter defenses can't guard against every threat vector, according to Michele Cantley, senior vice president and chief information security officer with Regions Bank, who testified at Friday's hearing on behalf of the Financial Services Information Sharing and Analysis Center. That group counts more than 4,400 members, accounting for the majority of the U.S. financial services sector.
"[C]orporate account takeover attempts cannot be stopped solely by the financial institutions," Cantley said. "All participants in the Internet ecosystem have roles to play. Banks, for instance, have no direct control over the end customers' computers, nor can banks control what emails bank customers open or what websites they visit prior to accessing their online systems."
Cantley concurred with other witnesses in their appeal for removing legal and compliance barriers to sharing threat information, an issue addressed by a bill that recently won approval in the House and awaits consideration in the Senate, where it faces an uphill climb amid competing cybersecurity legislation in an election season. Though they expressed some reservations about privacy and confidentiality concerns in the bill, the witnesses said they broadly supported the Cyber Intelligence Sharing and Protection Act.
But Cantley also told lawmakers that financial firms and others across the public and private sectors need to do more to educate users about safe computing, training them to detect the warning signs of phishing attacks, malware and other threats. Additionally, Cantley suggested that lawmakers could pursue legislation that would give Internet service providers more flexibility to filter out traffic carrying malicious content so that fewer threats would ever make to unsuspecting users' desktops.
Those appeals came with the predictable caveat that industry groups would resist initiatives to impose more prescriptive regulations that would oversee their cybersecurity efforts on a technical level.
Friday's hearing comes amid rising concerns about vulnerabilities not only to individuals transacting with financial institutions, but to the corporate networks themselves. After all, as the notorious outlaw Willie Sutton is said to have quipped when asked why he robbed banks, "That's where the money is," recalled Rep. Scott Garrett (R-N.J.), chairman of the House Financial Services Committee's Subcommittee on Capital Markets and Government-Sponsored Enterprises.
"Unfortunately, just as there have been many and numerous instances of identity theft out there, where individuals have credit cards stolen or accounts looted, there has also been a significant rise in corporate account takeovers as well," Garrett said.
But there is an important distinction between the garden-variety denial-of-service attacks perpetrated by hacker collectives such as Anonymous that can knock a site off line—grabbing headlines in the process—and the attacks that can infiltrate the inner walls of critical digital infrastructure such as financial trading platforms or top-secret nuclear systems, said Mark Graff, chief information security officer at NASDAQ OMX.
Graff, who only joined NASDAQ in April, has spent more than two decades in information security, including a recent stint overseeing the defenses at Lawrence Livermore National Laboratory, where nuclear secrets were among the more sensitive assets under his guard.
"I changed industries, but most of the challenges and many of the adversaries remain the same," said Graff, who stressed the need for tiered security that isolates mission-critical assets behind additional firewalls or in distinct network zones, keeping them away from the Internet.
"One key message in both institutions is the isolation of critical systems from the Internet at large. While many of the services we deliver to customers worldwide are housed on Internet-facing Web services, our trading and market systems are safely tucked away behind several layers of carefully arranged barriers," he said. "This is an important distinction to remember, and we should all keep this in mind when you hear about denial-of-service attacks against one institution or another. Any troublemaker can run up to the front door of a house and ring the doorbell over and over again, and that's what most denial-of-service attacks amount to."
Graff said that those attacks, while they might temporarily block consumers from accessing certain websites, are typically nothing more than an act of "vandalism," hardly a sign that anyone has gained entry to the house, by his metaphor.
But even in seeking to remove the sensationalism from the often breathless media coverage of cyber attacks, Graff acknowledged that the threats are very real.
"Effectively, all of the systems represented at this table," he said, "they're all under attack all the time at some level, in contrast to the situation just a few years ago. Today Internet attacks are a little bit like weather. We have a little bit more rain or a little less rain. Sometimes there's a hurricane that comes at us, but generally speaking they're all under attack."
In addition to a more fluid information-sharing framework—a point on which nearly all observers agree— Graff argued that corporate systems could achieve a higher degree of stability if hardware manufacturers and software producers did a better job of building security in at the time of production.
Additionally, he suggested that lawmakers and government officials could dramatically improve the nation's security posture if they took steps to shore up the supply chain for parts that tech companies import from overseas, citing concerns that compromised hardware could provide hostile foreign actors, including those working at the behest of their government, with an entry point into critical U.S. systems.
"The supply chain problem, the threats of supply chain attack, are really, I think, perhaps the knottiest problem, the most serious issue that faces us, and the one that would be most susceptible to help from government," Graff said. "I think it's one where the U.S. government really could make the biggest assistance."
Kenneth Corbin is a Washington, D.C.-based writer who covers government and regulatory issues for CIO.com.
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US refuses to let money matters affect military buildup in Asia - DAWN Group
JAKARTA: Proclaiming its fate to be strongly tied to Asia, the United States unveiled on Saturday detailed plans to build and strengthen its military presence in the region. Time will tell whether the growing US presence becomes a positive force for the peace, development and prosperity of Asia, or simply heightens the tensions in a region already convoluted by an arms race.
Asia is increasingly caught in the paradox of prosperity: as countries become more prosperous, they spend proportionally more of their new wealth on defence. They go on massive shopping sprees not only because they can afford to but mostly because they want to protect their economic interests to ensure sustainable growth and development.
Budgetary constraints dictated that US President Barack Obama draw down on the US military operations and presence in the Middle East and Europe but not in Asia, where China’s military is increasingly challenging US power and influence, though not necessarily yet its dominance.
In a much anticipated speech, Defence Secretary Leon Panetta said at the Shangri-La Dialogue in Singapore on Saturday that the US would deploy more aircraft carriers, cruisers, destroyers, submarines and combat ships, carrying the most advanced technology and weapons, in Asia as part of what he called the rebalancing of the US military to Asia.
If the US naval deployment in the past had been equally divided between the Pacific and Atlantic oceans, the Asian “pivot” will shift it 60/40 in the Pacific’s favour. The new policy not only calls for more frequent port calls and military exercises in the Pacific but also for beefing up the presence in Japan, Guam and northern Australia and for securing more access to military facilities in other friendly countries.
Under the plan, the US military will have the ability to project its forces anywhere in Asia. Washington has a vested interest in securing the safety of commerce and access to natural resources and has called on countries in Asia to respect freedom of navigation.
The new US policy seeks to strengthen ties through traditional alliances, such as with Japan, South Korea, Australia, Thailand and the Philippines, and also through partnerships with countries like Indonesia and India. Panetta also said the US was seeking to build military-to-military relations with China and Myanmar.
With the centre of global economic gravity shifting to the Asia-Pacific region, the US interests are inextricably linked to the fortunes of this part of the world. But Asia is also home to some of the world’s potential flashpoints: the tensions on the Korean Peninsula and across the Taiwan Strait, the Kashmir dispute between nuclear-powers India and Pakistan, the overlapping territorial claims involving China in the South China Sea and the North China Sea. The ongoing arms race has only intensified some of these tensions. Almost all the littoral states are investing heavily in strengthening their naval forces, taking their lead from China, signifying their intention to secure their maritime interests, from the safe passage of commercial vessels to the control of or access to the potentially big prize of rich underwater natural resources, including oil and gas reserves.
The new US policy comes amid growing tensions between China and the Philippines as both seek to assert their claim over the gas-rich Scarborough Shoal in the South China Sea. Responding to a question at the Shangri-La Dialogue, Panetta said the US would not interfere in any territorial disputes but it would insist that such disputes and any others be resolved in a peaceful manner and in accordance with international laws.
In spite of the military buildup by the US and the arms race among Asian countries, their governments profess to put diplomacy first in resolving their disputes. The Association of Southeast Asian Nations (Asean) and China are currently working on a binding code of conduct to address conflicting territorial claims in the South China Sea. Besides the Philippines, China also has disputes with Brunei, Malaysia and Vietnam in the region.
Indonesian President Susilo Bambang Yudhoyono in his keynote address to the Shangri-La Dialogue on Friday noted the evolution of a new security architecture in the Asia Pacific, not so much by design as by the proliferation of bilateral and multilateral cooperation agreements among countries in the region. He described these and the many joint military exercises as important confidence-building measures that would also help to eliminate the distrust often sowed by disputes and the rising tensions. They have certainly helped to keep peace in the region.
Yudhoyono repeated Indonesia’s proposal for a joint military exercise involving Indonesia, China and the US for humanitarian operations, recalling the massive international military deployment in the largest peacetime military operation in the wake of the deadly tsunami in Indonesia in 2004.
Asia-Pacific countries are also engaging actively even as virtually everyone is building up their military capability. In the absence of the equivalent of Nato, Asia has several forums in which the member states have addressed their common security problems and challenges, such as the Shangri-La Dialogue organised by the London-based International Institute for Strategic Studies, the Asean Regional Forum, the Asean Defence Ministers Meeting Plus and the East Asian Summit that involves 18 countries, including the US and Russia.
While the military buildup by countries in the region, including the US, seems the inevitable outcome of Asia’s rising economic prosperity, few are contemplating ever using their sophisticated and deadly weapons against their enemies, knowing full well that if anyone fired the first salvo, it could completely derail and undo all the progress of the entire region.As ironic as it may seem, in this context, many countries in the region welcome the stronger US military presence in Asia to further guarantee their peace and prosperity.
By arrangement with The Jakarta Post/ANN
G7 to hold emergency euro zone talks, Spain top concern - The Guardian
JPMorgan's Other Messy Problem: MF Global's Missing Money - Forbes
As the nation’s largest bank by assets JPMorgan Chase is bound to have its share of legal troubles but recently it’s been party to some of the ugliest accusations.
The most recent of JPM’s legal troubles are related to its massive trading loss of more than $2 billion. The loss has resulted in a number of lawsuits filed by employees and shareholders; even a probe by the FBI.
Today though a more complex legal issue resurfaced for JPMorgan. The trustee for the failed brokerage firm MF Global released a 285-page report about that firm’s bankruptcy, and it isn’t pretty. James Giddens says the former CEO, Jon Corzine, along with his executives may face legal claims for breach of fiduciary duty when they used customer money to fund a growing liquidity crisis.
To date, there is roughly $1.6 billion in missing client money at MF Global.
What does any of that have to do with JPMorgan Chase? It served as MF Global’s clearing bank. In fact, it was the agent for approximately $5.7 billion in securities lending transactions for MF Global, and in the final days of MF Global it was the recipient of some client money, according to the trustee’s report.
JPMorgan has not replied to a request for comment about today’s report.
In one instance in October MFGlobal was short on money in its JPMorgan accounts in London, according to the trustee. JPM’s Donna Dellosso, a ChiefRisk Officer Managing Director at JPM, had called MF Global CEO Jon Corzine about the overdraft issue. That same day on October 28, Corzine instructed MFGlobal’s Edith O’Brien, the brokerage’s former assistant treasurer to wire JPM money to clear the overdraft. She did with the following two transfers:
- a wire of $200 million from the JPM Customer Trust Account to the Treasury House Account
- and a wire of $175 million from the Treasury House Account to a account at JPM London
Later that day Dellosso followed up with her team at JPM to confirm that the money had been received. She learned that the initial $200 million was transferred from the JPM Customer Trust Account. From the report:
A JPM employee reportedly told Ms. Dellosso that movement of monies from a customer segregated account to a house account was not an uncommon practice for MFGI.95 Ms. Dellosso informed Mr. Zubrow that MFGI had in fact made the transfers to cover the overdraft, but that the funding for the transfer came from a Customer Segregated account.
Dellosso and her team reacted by reaching out to Corzine again this time asking him to offer written confirmation that the money it had transferred represented its own funds and thus that it was entitled to withdraw them pursuant to CFTC Rule 1.23. In other words, that the money being sent to JPMorgan did not belong to MF Global clients.
That’s when Laurie Ferber, the General Counsel at MF Global gets involved. MF Global said it was hesitant to sign the letter confirming that the funds belonged to MF Global because was it was “overly broad in that it referred to all transfers that had ever been made out of these accounts, which…would have necessitated a time-consuming administrative burden to review all such transactions.”
After much back in forth between JPM’s team and MF Global’s counsel the latter did not sign the letter. The report says:
JPM did not at any time receive a signed version of the letter, and there appear to have been no further discussions regarding the letter. Mr. Klejna advises that on Saturday evening Ms. O’Brien refused to sign the letter, even as narrowed, but indicated that she felt the transfers were appropriate based on an excess in the Customer Segregated accounts. The Trustee’s professionals have been unable to discern any basis for this alleged statement.
The problem is obviously that JPM never got the confirmation but took in the wire transfer any way.
Gidden,s whose job it is to recover as much as the customer money as possible, says JPM is cooperating with his investigation. To date, JPM has returned approximately $89.2 million in customer property and $518.4 million in non-segregated unallocated MF Global assets.
But that doesn’t mean JPM is in the clear. If talks with JPM stall then it will be in for a lawsuit. From the report: In the event these discussions do not result in an agreement, the Trustee, if appropriate, will commence litigation.
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